Smith Micro Software, Inc. (NASDAQ:SMSI) shareholders would be excited to see that the share price has had a great month, posting a 65% gain and recovering from prior weakness. But the last month did very little to improve the 81% share price decline over the last year.

In spite of the firm bounce in price, Smith Micro Software may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 1x, considering almost half of all companies in the Software industry in the United States have P/S ratios greater than 5.4x and even P/S higher than 13x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

How Smith Micro Software Has Been Performing

Smith Micro Software hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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What Are Revenue Growth Metrics Telling Us About The Low P/S?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Smith Micro Software's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 57% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 34% each year during the coming three years according to the three analysts following the company. With the industry only predicted to deliver 21% per annum, the company is positioned for a stronger revenue result.

In light of this, it's peculiar that Smith Micro Software's P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

Shares in Smith Micro Software have risen appreciably however, its P/S is still subdued. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

A look at Smith Micro Software's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. There could be some major risk factors that are placing downward pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.